How to trade cryptocurrency using fundamental analysis
This guide provides a detailed overview of the top tools and techniques of how to trade cryptocurrencies using fundamental analysis and in turn make a profit.
Trading in the cryptocurrency markets can be very daunting due to the infancy of the cryptocurrency space and the lack of a long history.
In traditional markets, such as the stock market, traders make decisions by looking at both technical and fundamental analysis techniques.
However, a vast amount of cryptocurrency traders lack or dismiss the importance of fundamental analysis whilst trading cryptocurrency, this is why we have created a comprehensive guide to help you trade cryptocurrencies using the fundamental information available at this moment in time.
What is cryptocurrency fundamental analysis?
Before we go any further it is important to define the term “cryptocurrency fundamental analysis”. Cryptocurrency fundamental analysis is a forecasting method used to predict the price of a digital asset, typically in the mid to long-term.
This method does not rely so heavily on the exact price at the moment but considers all the available information about that particular cryptocurrency and all the current and future factors that may influence the price.
Traditionally fundamental analysis is useless in short term. Stock investors for example apply this forecasting method to get the general picture of an asset’s value. In the case of cryptocurrencies, it can be seen as of little importance as to predict too far into the future as cryptocurrency markets changes in a very fast manner, thus whilst using cryptocurrency fundamental anaylsis we tend to focus in the range of mid to long term.
The following four points are traditionally used to summarize the workings and reasoning behind fundamental analysis:
- The price of every asset changes due to a specific reason.
- We can find this reason by analysing the asset and its interactions in detail.
- Any news, rumours or events has consequences which can affect the price of the asset.
- If one person knows all the facts and can make the right decision, that person is able to predict future price of that asset.
The above points relate to the cryptocurrency trading space as well, however, some traditional methods inside fundamental analysis needs to be changed to analyse crypto specifically. New tools need to be developed and the needed data and information is found in a variety of different areas.
Cryptocurrencies are similar to both currencies and stocks and thus has a combination of both’s features alongside the new features discussed above. All those specific features affect cryptocurrency fundamental analysis and make it unlike anything we had before.
Where to get your fundamental information and its importance
Looking at traditional investments such as stocks for example, fundamental analysis entails evaluating the financial health and viability of a company according to the contents and conclusions drawn from its financial statements, usually made available to the public by the company. If the conclusions look promising, meaning the company is in good financial health and growth is almost guaranteed, we state that the company has good fundamentals and we can, therefore, invest in it.
In the cryptocurrency space however, performing fundamental analysis is radically different due to the fact that there are no financial statements. This is due to the following reasons:
- A Cryptocurrency is not a corporation. Cryptocurrencies are not based on generating revenue such as corporations but is rather seen as a store of value within a network.
- Cryptocurrencies do not have a long history. Due to the infancy of cryptocurrencies, almost all cryptocurrencies are in their development stage. This means that there are limited adoption and a limited track records available.
Due to the above-mentioned reasons, fundamental analysis of cryptocurrencies must be performed with a different methodology. A good understanding of a cryptocurrency’s fundamentals allows you to form your educated opinions and have data and information backing it, which is rare in the crypto world due to its complexity.
Here are a few ways on where to begin your fundamental analysis:
- Cryptocurrency’s white paper
A cryptocurrency’s white paper is a detailed proposal, usually written or typed out, by the cryptocurrency’s development team. This paper outlines the purpose and ‘internal workings’ of the specific cryptocurrency and represents the main source of evaluating the fundamentals of the cryptocurrency. The white paper is one of the first things you must read while performing fundamental analysis on specific coins or tokens. Note that these papers can get very technical, it is good idea to understand the jargon if you are going to read these.
- Cryptocurrency’s website, channel or blog
One of the next places you as an investor or trader would want to have a look at is the cryptocurrency’s website, channel or blog, depending on the platform used by the userbase. This could represent the official and main channel of communication of the core development team. Our cryptocurrency market cap is the best all-in-one tool to keep in the loop on any specific cryptocurrency activity, news or any form of communication.
These channels could also be on platforms such as Telegram, WhatsApp or Discord channels and it is necessary to join them and ask questions to get more information on the cryptocurrency you are analysing. This is also a great way to interact directly with the developers and find out if they are trusted and moving the cryptocurrency forward. Be sure to follow the updates given by the developers in their official blog to track the progress and see if the developers are truly following their roadmap usually found on their website.
- Community Forums
This is probably one of the places traditional investors would’ve never considered on gathering information for their fundamental analysis but in the cryptocurrency space, forums are a great way to get a better understanding of the cryptocurrency, as well as the sentiments surrounding the cryptocurrency. This is also a great platform to speak with other possible investors in the cryptocurrency space and discuss and share information with each other.
What to look for in projects
Now that you know where to find the information or data on a specific cryptocurrency you are analysing. The next step entails which questions to ask and which information to look at whether to decide fundamentally if the cryptocurrency you are analysing is a good investment. Here are a few attributes to look at to determine whether it is a good investment or not:
- Long-term Scalability
In the long term, one of the fundamental issues that needs to be solved in blockchain technology is the issue of scaling. The blockchain model depends on all connected nodes, miners, to process and agree on every transaction. This protocol quickly runs into limitations of how fast a payment can be distributed, stored and verified. Currently there are many cryptocurrency projects out there which claims they have solved these problems and promises close to a million transactions per second. It is important to note that almost all of these approaches are either impractical in real life or break the fundamental premise of a cryptocurrency being trust-less and decentralized. Thus, while doing your fundamental analysis it is important to look at the implementations the developers are performing to advance realistic scalability of their technology. For more information on how this could be done, read up on the concept of sharding.
- Trust-less decentralization
The concept of trust-less value transfer or trust-less execution is one of the most important properties a cryptocurrency can have. This should be the backbone of the cryptocurrency you are analysing. For example, a transaction can be sent to anyone anywhere in the world without needing a bank or escrow involved.
Be aware of some cryptocurrencies with too simple implementations or a mirror of already established implementations as simple transactions are very basic and has a limited use-case. For example, it does not make sense investing in a cryptocurrency that does precisely the same as Bitcoin, as Bitcoin is already established and will be the best in that field. A project has to offer a unique and useful advancement on basic blockchain technology.
- Usefulness of the cryptocurrency
Also, one of the most important factors to look at is for who the cryptocurrency is developed for and whether it truly enriches those peoples lives. There have been many cases where teams tried applying blockchain in a misguided manner to any and all systems to join in with the hype. This is obviously then useless, unless you need the very specific properties of a decentralized and trust-less system, Blockchain is no more than a different type of higher tier database.
Pros and cons of fundamental analysis
Fundamental analysis of cryptocurrencies has its advantages and disadvantages. One of the biggest advantages is that these forecasting methods allow you to understand the general situation on the crypto market and find the general tendency. Another advantage is that it lets the investor understand precisely what he/she is investing in and not speculating on the ‘product’.
One of the biggest disadvantages is the misinterpretation of any situation. When you deal with fundamental analysis, you risk misinterpreting every situation. For example, you may come to a conclusion that this or that event will increase crypto’s price, but the price stands still or even decline. Fundamental analysis in the cryptocurrency industry is even more subjective than technical analysis.
The second disadvantages discussed is that this forecasting method is difficult to conduct for beginners with limited knowledge in this field. You need not only to know how to gather information but also understand how to use it and what it means.
Hopefully, after reading this article you now have a better understanding of fundamental analysis and how it is performed in the cryptocurrency space. While there is a magnitude of innovation across the cryptocurrency space, caution is still strongly advised. It is advised to do further research on this topic and be 100% informed of everything there is to know about the cryptocurrency you would like to invest in.
If you would like to learn how to use fundamental analysis whilst trading cryptocurrencies than our trading academy and mentorship services are designed to support you into becoming a profitable trader.